What utilities need to know about the five-minute settlement rule

At the end of 2017, the Australian Energy
Market Commission (AEMC) made a landmark ruling: the price settlement interval
for the wholesale electricity market, which has been set at 30 minutes for the
last two decades, will be reduced to five minutes.

Now, as the mid-2021 implementation date for
this five-minute settlement rule draws closer, utilities are having to consider
the implications of the required upgrades to their metering and IT systems.

How much will these changes cost? How long will they take to implement? And how can they know for sure whether they’re adequately prepared?

Answering these questions starts with understanding just what the five-minute rule change entails, and what specific challenges utilities can expect to face as a result.

Dispatch versus settlement

The national electricity market (NEM) is built
to make it easier for generators — producers of electricity — and retailers —
those who distribute electricity to customers — to do business with each other.

Generators submit bids to the Australian
Energy Market Operator (AEMO) to signal their willingness to supply electricity
at a specified price. AEMO then collects these bids, sorts them by price, and
chooses whose energy gets dispatched every five minutes.

While electricity is distributed in five
minute blocks, the settlement price —
what retailers pay the generators — is determined every 30 minutes in the
current system. This ‘spot’ price that all generators receive is therefore the
average of the six dispatch prices that happen each half hour.

The discrepancy between the five-minute dispatch interval and 30-minute settlement timeframe was necessary due to technological limitations when the system was established in the late 1990s, but data processing and metering technology have progressed to the point where the physical electricity system and the price signal can align.

The AEMC has determined to do exactly that on 1 July 2021 — the day when the new settlement rule goes into effect and reduces the 30-minute interval to five minutes.

Challenges and solutions

While the settlement–dispatch parity makes
sense, the sixfold reduction in the settlement window brings new challenges for
utilities.

In particular, forecasters will have to
significantly increase the speed and sensitivity of their forecasting process
in order to accurately predict prices in the shorter intervals.

Emerging technologies such as distributed
energy resources increase the complexity of the situation even more.

Utility forecasters are already spread thin as
they attempt to rework their systems to make room for batteries, solar panels
and the other variables in the rapidly evolving energy market. Contemplating
the five-minute settlement rule on top of all that can be a daunting prospect.

To solve this problem, many utilities are
looking to supplement their internal forecasting efforts with help from analytical
services organisations.

Analytics software provider SAS offers just
such a solution with SAS Energy Forecasting. The comprehensive service supports
the entire forecasting process, from data management and model development to
predictive analytics and business reporting, and grants forecasters advanced
knowledge of the energy/price curve for each interval period.

“Without accurate forecasting, energy retailers risk buying too much and having to sell back at a loss, or purchasing too little and needing to pay a premium for the remainder,” said Grant Dyer, Energy, Utilities & Telecommunications Industry Lead for SAS Australia & New Zealand.

“Such mistakes can majorly eat into profits, and the companies who ultimately succeed in today’s fast-moving and ultra-competitive market will likely be the ones who stumble the least.”

Fortunately, forecasting mistakes are avoidable. SAS Energy Forecasting’s highly-sophisticated set of algorithms are purpose-built to increase margins, take full advantage of smart meter data, and enhance generation and trade operation decision-making for utilities.